How Much Can You REALLY Put Into Whole Life Insurance? Contribution Limits Explained

Hey everyone, welcome back to the channel. It's Demetrius, life insurance strategist and team lead here at Better Wealth. And in this video, I want to answer this question. I want to answer, are you limited in how much you can put into an overfunded whole life insurance policy? And the answer is kind of yes and no at the same time. And so what we're going to do is we're going to break this down by first comparing and more so contrasting it to retirement accounts, because you're probably a little bit more familiar with those perhaps. And then we'll talk about why life insurance works a little bit differently. and how your contribution limits are actually tied to factors like your income, your net worth, how we structure the policy from the very beginning. And finally, I'll show you how a properly designed policy gives you the flexibility to contribute less when life changes or even increase your contribution as your capacity to do so grows over time. And so when it comes to traditional retirement accounts, just kind of getting that out the way, those limits are universal, okay? And so they're set by the government. They apply to everyone. And so, for example, with a 401k, it's $23,000 per year, $23,500 per year. With traditional and Roth IRAs, the limit is $7,000 per year. And I'm not accounting for catch-up contributions for those over the age of 50, but just kind of making the point here. And I want to just also acknowledge that there are strategies out there like backdoor Roths, mega backdoor Roths, things like that. But even those still come with strict IRS limits. Doesn't make them wrong. Doesn't make them good or bad. It's just what it is. And so the point that I'm making here is that with retirement accounts, there is a hard ceiling that really no one can really bypass. OK, and so contrast that with a properly structured, overfunded whole life insurance policies, those government set limits, they don't apply. This doesn't mean, though, that your contributions to these policies is absolutely unlimited, per se. It does mean, though, that there is not a set limit across the board universally. universally. And so instead of you having it all based on the tax code. Instead of contributions to these policies being based on the tax code, your contribution limits are based on a couple of things. Number one is how your policy is structured, especially with how much room you have for paid up additions, which is one of the main drivers behind overfunded high cash value policies. That's what makes the policy high cash value from the very beginning. But then we also, the second piece is how you qualify from an underwriting standpoint, meaning Your income, your net worth, your age, things of that nature are some of the factors that go into the qualification standpoint. And so, yes, there are limits, but they're tailored to you specifically. There's not a blanket set limit across the board for everyone. OK, so let's assume for the moment that someone wants to contribute to a policy and they eventually want to get to a point where they reach their maximum. But right now, their current cash flow doesn't allow. for that to happen, right? It just doesn't make sense at this time and at this point in time. Even though they want to contribute the maximum eventually, they don't have to start with their maximum in order to make that happen in the future. I hope that makes sense. And so a lot of people that we've worked with specifically here at Better Wealth, they grow into a larger policy over time. And what I mean by this is this. When we design a policy, we can illustrate a starting contribution. So let's say, for example, $75,000 per year, okay? And then what we can do from there is we can build in flexibility so you can increase that amount later on if you want to. So let's actually take a look and see what this looks like with a side by side comparison. With the side by side comparison, what you're seeing here on the on the far left hand side is a policy that's showing seventy five thousand dollars per year inside of the policy. On the right, we're seeing one hundred thousand dollars per year in that policy. One of the things that's important to note is that both of these policies are actually the exact same policy. All we're doing is we're illustrating the same exact policy at different funding levels. So the way that I can kind of highlight how this is the case is if you look at age 56 on both of these policies here, what you're noticing is that that premium is $21,702. Okay. So that $21,702 is that minimum required premium, which includes both the base premium and the the term insurance rider. Okay. And so what that means is the ceiling for this particular poly so happens to be $100,000, but we're not illustrating that to the one on the left. The reason someone would go forth with something like this is because perhaps they're really comfortable with something like $75,000 per year at the very beginning, but then maybe a couple of years down the line, a few years down the line, they want to contribute all the way up to a hundred thousand. Not to mention, you'll also have the the flexibility to contribute a lot lower if you wanted to when life happens. So whether you want to ratchet it upward or you want to ratchet it downward, you have a lot of flexibility. And this is what I mean by you having the ability and flexibility to grow into a larger policy. So just to reiterate, so in the example that I shared, if you're really comfortable, again, contributing $75,000 per year. and there's a reasonable expectation that your income will increase or you'll be coming across some additional cash flow in the next few years or something like that, and you really want a place to store that capital, we can build in that exact level of flexibility for you. And it'll be completely up to you when you want to contribute the additional cash flow simply by logging into the portal and contributing the additional paid up additions. Now, the key is we set up the structure at the very beginning so that when you want to contribute more later. you can do so without violating your maximum limits and without violating the seven pay mech test as well. But we have to get it right from day one. We have to get a good sense of what things might look like in the short term, in the medium term, in the long term, which will give us a gauge for how to present the best options for you regardless of what that may be, because it's gonna be different and nuancy from person to person. So earlier, I alluded to the fact that you're not limited to what you see on the illustration. And that there's a pretty large range for what you can contribute to the policy in any given year, especially when it's designed the way we design these policies for high levels of cash value. It's also important to mention how carriers tend to think about individual limitations, like how much will they allow you to put into a policy in reality? And so it really boils down to a couple of different things. I'm going to talk about it in two different ways. Right. So your annual contributions typically and this is a general rule of thumb. is not like across the board, true for every situation, but your annual contribution in terms of the cap will be around 25 to 30% of your gross annual income. Now, if you're a person who's wanting to reposition a large sum of cash that so happens to be significantly higher than 25% of your gross annual income, we tend to call these front-loaded policies. You want to reposition a ton of cash at once. The limit for that is... typically around 25 to 30% approximately of your total net worth. And again, this is going to differ depending on the carrier that you're working with. And perhaps these numbers could be a little bit conservative depending on the situation overall. And so behind the scenes, there's also a death benefit cap that's associated with all this. And that's based on your age and it's based on your income, right? And perhaps we could probably get into the specifics of that in another video. But for this video, the simple takeaway is this, okay? We design your policy with the limits that you qualify for. And if you want the flexibility to increase your contributions later, we can build that into the structure from the very beginning. Part of that means that we're making sure that you still qualify for the amount of death benefit that's tied to those higher contributions, right? But in most cases, that's not necessarily an issue with the folks that we're working with, especially because we're designing the policy primarily for cash value growth. which naturally kind of keeps the death benefit lower than a traditional death benefit focused policies if you had those same dollars going into a policy like that. So why does this matter at all? What's the moral of the story here? Well, the point of this all is that overfunded whole life insurance is one of those few places where you can put capital in, you get tax advantage growth, meaning that it's going to grow tax deferred, you can access it tax free. There's liquidity and control literally to do whatever you wish, whenever you wish with those dollars. And it's a non-correlated asset, meaning that it's not tied to any of the crazy market swings that tend to happen in many markets out there. And if you're entrepreneurial, you're a value creator, you value safety. A lot of times it just makes sense to have something safe, something stable and liquid so that once opportunities do come on the horizon, you're ready to take advantage of those opportunities, right? It's not about replacing your other accounts. It's about adding a powerful foundation to your overarching strategy, okay? And so to wrap this all up with a pretty bow. Yes, there are limits, but those limits depend on you, right? Not the totality and the average of the entire nation and rules set upon you by the government. OK, overarchingly, it's based on your income, your network, your age, factors like that. And if you want to delve a little bit deeper and talk to someone about your specific situation and how much you could actually contribute to a policy, go ahead and schedule a free call with our team. We're here to help. We're happy to walk you through it. And if this video gave you any clarity whatsoever, do me a favor, do me a solid, hit the like button, subscribe, and we'll see you in the next video. Thanks for watching.